Governments generally resort to borrowings for any shortfall in meeting their expenditure. The share of borrowings in the total expenditure varies from state to state as the nature of their receipts is different. The common trend witnessed across the states is an increased reliance on borrowings during the pandemic.
Governments incur various expenditures in the form of salaries, pensions, subsidies, schemes, investments in infrastructure, and other operational expenditures. The expenditure is met through the revenue generated from various sources like taxes, grants, and non-tax expenditures like royalties among other things. The annual budget documents provide details of the estimated expenditure for the year and the expected revenue to be generated. Any shortfall in the revenues is usually met through borrowings from various sources. Governments also make provisions for borrowings in the annual budgets.
Various factors influence the expenditure incurred and the revenue generated, which in turn influence the extent of borrowings made by the government. Relying on borrowings to meet the expenditure is not sustainable as they are a liability for the future. However, borrowings cannot be seen as an isolated number but from the perspective of GSDP growth and the state’s capacity to repay, in addition to the assets being built with such borrowings. Borrowings by themselves do not convey any substantial trend.
In an earlier story, we highlighted that the central debt, as well as the borrowings of the States, have increased during the pandemic. The reliance on borrowings to meet the expenditure varied across the states. In this story, we look at data related to borrowings of the States over the past five years (2017-18 to 2021-22) and analyse the trends.
Methodology: Information available in ‘Accounts at Glance’ reports submitted by the respective states to the Comptroller & Auditor General (CAG) is considered for analysis. These reports are for the four-year period 2017-18 to 2020-21. For the recently ended 2021-22, we have considered the data from “Monthly Key Indicators”. For those states where the ‘Accounts at Glance’ reports were not available for a particular year, ‘Monthly Key Indicators’ reports were considered. Actuals under the head ‘Borrowings & Other Liabilities’ are considered as ‘borrowings’ in the story. Actual expenditure is being considered for ‘Actual budget expenditure’ For purpose of categorization, five-year cumulative data (2017-18 to 2021-22) is being considered. The states are categorised based on the ratio of Borrowings compared to the ‘Actual Budget Expenditure’ (ABE) Goa, Delhi & Puducherry are not considered for analysis as the data is not available with CAG. However, it has to be noted that the actual amount of borrowings as shown in the budget documents may not include off-budget borrowings or off-budget financing that are generally financed through Government-owned or controlled public sector enterprises or departmental commercial undertakings, which raise the resources through market borrowings on behalf of the Government.
In Tamil Nadu, Telangana, Kerala & Haryana, the pandemic has further increased an already higher share of borrowings
As per the five-year cumulative data (2017-18 to 2021-22), more than 25% of their actual expenditure (ABE) was met through borrowings & other liabilities in the case of five states. These states include Haryana, Tamil Nadu, Telangana & Kerala along with the northeastern state of Nagaland. In the case of the four large states, the share of Debt was already high prior to the pandemic, which further increased during 2020-21.
In 2019-20, the portion of borrowings in the case of Haryana was 29%, which increased to 30.2% in 2020-21. It slightly reduced in 2021-22. Tamil Nadu & Telangana had an increasing trend of a higher share of borrowings between 20-25% which increased to 32% & 34% for Telangana & Tamil Nadu respectively in the pandemic year of 2020-21.
In the case of Kerala, the state was showing a year-on-year improvement in reducing the share of debt, but the trend was reversed in 2020-21, with the share increasing to 29.5%. The higher cumulative share of Nagaland can be attributed to the pandemic. Prior to the pandemic, the state’s reliance on borrowings was around 6.5%. But in 2020-21, it increased to 45.9%. The state has yet to recover, with the debts still accounting for 37.7% of the state’s means to meet the expenditure.
A.P, Karnataka & Rajasthan reduced the dependence on borrowings in 2021-22
The five-year cumulative value of 6 states shows that they met around 20-25% of ABE through borrowings. These states showed varying trends in the five years, but the consistent factor was the reliance on borrowings increased during the pandemic hit 2020-21.
Andhra Pradesh is among the states which have a higher dependence on borrowings to meet its expenditure. It was around 23.5% in 2017-18, which was the second highest for that year. It increased in subsequent years. In 2020-21, 31.8% of its ABE was met through borrowings. However, borrowings were reduced to 14.3% of ABE largely because the state was not allowed to raise more loans.
Karnataka & Rajasthan have also shown an improvement with a lesser reliance on borrowings in 2021-22 after the high during the pandemic hit 2020-21 while the proportion of borrowings of West Bengal remained nearly the same even in 2021-22.
However, the situation in Punjab shows a different trend. Unlike A.P & West Bengal, Punjab was on its path to reducing its reliance on borrowings prior to the pandemic. But in 2020-21, it increased to 24.6% from 17% in the previous year. In 2021-22, it further increased to 26.3%.
As was the case with another northeastern state of Nagaland, Manipur also had a disproportionate increase in the quantum of borrowings during 2020-21. In that year, the state met 69.5% of its expenditure via borrowings & other liabilities.
Gujarat & Madhya Pradesh had an increased reliance on borrowings in 2020-21, in contrast to a general trend
Irrespective of the general trend in the proportion of borrowings of the states, the COVID-19 pandemic seems to have a similar impact on almost all the states. Gujarat is one such example. Prior to 2020-21, borrowings constituted around 14-16% of the state’s revenue sources to meet its expenditure. In 2021-22, the borrowings increased by 1.5 times, with 22.6% of the expenditure met through borrowings. However, it halved in 2021-22. The borrowings of Madhya Pradesh also increased by 1.5 times in 2020-21, and more than 1 quarter of the expenditure for the year was met through borrowings. The situation improved in the ensuing year.
Assam & Uttarakhand reported a contrasting trend to what is seen in most of the states. The reliance on borrowings was reduced during 2020-21 compared to the earlier years. An increase in grants-in-aid & contributions has come to the rescue of both these states in 2020-21 during the pandemic year. Like other northeastern states, which have smaller budgets, the borrowings in 2020-21 disproportionally skewed their generic trend. However, it ought to be noted that even in 2019-20, Sikkim had a higher share of borrowings.
Impact of pandemic visible on Maharashtra which traditionally has lower dependence on borrowings
Among the large states, Maharashtra traditionally had a lower dependence on borrowings to meet its expenditure. In 2017-18 & 2018-19, it was less than 9%. However, the reliance on borrowings increased in 2019-20, to 15.9%. The volume of borrowings and liabilities more than doubled to Rs. 53.8 thousand crores. This further increased to Rs. 71.5 thousand crores i.e., 20.8% in 2021-22. The situation improved in 2021-22 but is still much higher than the pre-pandemic period. An increase in overall tax revenue has contributed to the improvement.
Bihar & Jharkhand also reported a similar trend with an increased reliance on borrowings in 2020-21, despite a lower share in the earlier years. With the fall in tax revenues, Chhattisgarh had to rely on borrowings in 2019-20 & 2020-21. In contrast, Himachal Pradesh & Tripura have lesser dependence on borrowings even during the pandemic. A higher grant-in-aid has managed to cover the deficit.
U.P & Odisha have a lesser dependency on borrowings compared to other large states
Uttar Pradesh has the highest expenditure among the states because it is the most populous state in the country. However, the reliance on borrowings has traditionally been lower. The pandemic increased the reliance on borrowings to 15.6% in 2020-21, which is traditionally less than 10%. A major contributor to the revenue of the U.P is its share of union taxes. This comes to the aid of Uttar Pradesh despite a marginal performance state’s own tax revenue. Odisha is another state with lower reliance on borrowings. Non-tax revenue & grants-in-aid generally make up for the deficit instead of the borrowings in the case of Odisha.
Pandemic increased the reliance of States on Borrowings
As discussed earlier, borrowings or their share by themselves may not represent the full picture of the economy of a state as multiple factors affect the same. In general, the trend witnessed across states is an increased reliance on borrowings in the pandemic year of 2020-21.
In some states, the share of borrowings is lower (like in the case of Uttar Pradesh) despite their own tax revenue generation is lower. This is because of the higher share in union taxes and a higher amount of grants-in-aid.
Featured Image: Share of borrowings in total expenditure
